Brokers hunt for the next Fortescue

Junior resources floats are underpinned by blue sky dreams, that one-in-a-million chance of finding the next
Fortescue Metals Group
and watching a small investment sky-rocket into something much more meaningful.

Some fund managers say backing such juniors is like buying a lottery ticket. But as lottery players will tell you, someone has got to get lucky.

Junior resources companies have propped up Australia’s initial public offering market since the global financial crisis. The fact that so many get away shows starry-eyed investors are willing to take a punt when they spot something they like, be it a certain management team, an unloved tenement or a move into the “it" commodity of the day.

Fortis Mining
had all of the above. The stock listed for 20¢ a share last December and went on to trade as high as $3.98 in March, before returning to about the $1.15 mark more recently.

It was the 2010-11 financial year’s top float and won brokers Ben Faulkner from RBS Morgans and John Clarkson from Macquarie Private Wealth the best corporate deal award at the recent Australian Stockbrokers Foundation awards. It has also made their clients some pretty good money so far.

The deal didn’t have an underwriter or sponsoring broker: neither Macquarie nor RBS Morgans was willing to underwrite or sponsor the float. Faulkner and Clarkson had relationships with the company.

“I was attracted to Fortis, given its tight capital structure and Western Australian assets in which previous exploration and drilling had highlighted potential for mineralisation," Faulkner says. “The projects were also strategically located in the western goldfields."

While the goldfields assets were a good starting point, it was Fortis’s move offshore that really put a rocket under its share price.

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Not long after listing, Fortis acquired two potash reserves in Kazakhstan. It has had to stall its potash expansion until shareholders vote to change the company’s main activity from base metal explorer to potash company at the next extraordinary general meeting.

There’s even talk it might spin the original gold assets into a separately listed company towards the end of the year, which would please the original investors.

As explored in the Inside the Deal column in the Weekend Financial Review last weekend, Fortis founders
Frank Cannavo
and
Jitto Arulampalam
hired Faulkner and Robertson last November to sell $3 million worth of stock.

The location of the tenements was the main selling point. Four of the company’s five assets were alongside major producing mines, including Newmont’s Jundee goldmine and Barrick Gold’s Centenary goldmine.

But entrepreneur Cannavo says the story was always more than just the existing assets. ‘It’s about the people, relationships and management," he says. “We want FMJ to be like FMG [Fortescue Metals], but a potash play."

For Faulkner and Clarkson, backing Fortis has already begun to pay dividends. The brokers, based in Melbourne and Sydney respectively, each sold about $1 million of Fortis shares to their respective clients.

The brokers placed the shares to their own clients but were covered by their firm’s Australian financial services licence. “Risk management is a focus for Macquarie. All deals need to go through rigorous assessment before we can participate," Clarkson says, referring to the screening process where Macquarie’s central deal assessment committee must clear a deal before a broker can place the shares. It is understood RBS Morgans has a similar process.

The process is typical of many junior floats every year. The Australian Securities and Investments Commission requirement that broking houses have a minimum $10 million capital has forced some consolidation and reshaping of the industry.

While the capital requirements have been pushed back to 2013, a number of brokers consolidated early, including Southern Cross Equities, Montague and Tolhurst. Others, like Opes Prime and Sonray, have disappeared.

ASIC’s push for more broker capital has also led to the formation of a range of corporate-financial advisers which link the traditional broking houses to their list of high net worth clients.

Faulkner and Clarkson’s involvement also shows that the east coast brokers are doing their best to muscle their way into resources, typically the domain of west coast houses like Patersons, Hartleys and DJ Carmichael. “The number of small resources companies on the market has increased significantly over the past few years and we have been successful in picking a few winners that have made our clients some good money," Faulkner says.